Reason Foundation

Detroit as the Prodigal Son

Why is the government rewarding failure?

In the New Testament story, a man has two sons. One of them demands his inheritance, runs off and squanders it all having a wild time, and ends up penniless.

At that point, he slinks home in disgrace, assuming he will have to beg forgiveness. But his father is so thrilled to have him back that he kills a fatted calf and throws a party to celebrate the prodigal son's return.

Not a bad deal, huh? Unless you're the other son, who worked hard for his father and avoided loose women but never got the big fiesta. He felt cheated, and it's hard to blame him.

People employed by automakers other than General Motors and Chrysler would be justified in feeling the same way. Last fall, facing bankruptcy, those companies sought and received some $17 billion in federal loans intended to keep them in business. Now they are back asking for more—$16.6 billion for GM and $5 billion for Chrysler.

That doesn't count the $7.7 billion GM wants to improve fuel economy or the $5 billion its financial arm got from the Treasury Department. Nor does it exclude the possibility that they will demand more help in the future.

And what about the automakers that have not run themselves into the ground? They get nothing. Actually, they get worse than nothing: They get the privilege of competing not just against GM and Chrysler but against the federal government, which has unlimited resources and is now in full partnership with the two.

It's not just Ford, Toyota, Honda, Nissan, Volkswagen, and all the other companies that sell (and often build) cars here that are seeing their wisdom and restraint punished. It's also the American people—most of whom voted with their pocketbooks not to support GM and Chrysler but now see their money forcibly diverted to those automakers anyway.

For years, Detroit has been relentlessly driving customers away. In 1985, the Big Three accounted for 80 percent of all the cars sold in this country. Today, their share of the market is just 43 percent.

Their high costs and inferior reputation for quality have hindered them in competition for some 30 years. So in good times and bad, they lag behind more efficient rivals.

The financial losses they've compiled recently convey an unmistakable message from consumers: We are no longer willing to buy your vehicles at a price that pays you to make them—if we are willing to buy them at all. The Big Three had a fat inheritance, and they managed to blow it.

Their overseas competitors, by contrast, had to start from zero selling cars in the United States, find customers, prove the worthiness of their vehicles and dealers—even, in many cases, build factories here and train American workers to meet their standards.

Some companies, foreign and domestic, couldn't hack it. You don't see dealers selling Ramblers, Fiats, or Renaults anymore. But many did exactly what our capitalist system requires them to do, only to be rudely informed that the requirements have changed. Instead of being rewarded for their achievements, they now watch as the government rewards failure.

Helping these two automakers means harming the rest. The market for new cars has shrunk and it's not going to regain its old size anytime soon. By rescuing GM and Chrysler, the government is taking future sales away from competitors. If one automaker gets the fatted calf, another one will have to do without.

In a normal market economy, things would proceed differently. The weak firms would file for bankruptcy and be forced to take drastic measures to cut their costs. They would shrink even more than they proposed last week and might even shut down.

These developments would be a bad thing for their shareholders and employees but a good thing for consumers. Competing carmakers would have the chance to hire their workers, purchase their factories, take over their dealerships, and attract their customers. The economy would also benefit, because resources Chrysler and GM were wasting would be used more productively.

Instead, the government has impeded this process—managing a neat combination of bad economics and blatant unfairness. In 21st-century America, it's good to be the prodigal son.